Letting an employee go - especially in a small team - isn’t easy. But how you handle the exit can shape everything from your company’s reputation to your legal exposure. That’s where severance agreements come in.
A well-crafted severance agreement can help both sides move on cleanly, with clarity and closure. Here’s what founders need to know.
What Is a Severance Agreement?
A severance agreement is a contract signed at or near the end of employment that usually includes:
- A payment or benefit (e.g., continued salary, insurance, equity vesting)
- In exchange for a release of claims by the employee
- Plus reaffirmation of confidentiality, non-disparagement, and IP obligations
It’s not required by law - but when used wisely, it can be one of your best risk management tools.
When to Use One
Consider a severance agreement when:
- You’re doing layoffs or role eliminations
- The employee has raised complaints or legal concerns
- You want to protect sensitive company information
- You want to ensure a smooth and amicable transition
In other words, anytime there's a risk the departure could lead to friction - or you just want to protect your business.
Key Terms to Include
- Severance Pay: Often based on tenure (e.g., 2 weeks’ pay per year of service), but startups can customize. May include a lump sum or continued salary for a period of time.
- Waiver and Release of Claims: The employee agrees not to sue for wrongful termination, discrimination, etc. This must be clearly worded and legally compliant (especially for older workers - see below).
- Confidentiality and Non-Disparagement: Reaffirms that the employee won’t disclose trade secrets or publicly badmouth the company.
- Return of Company Property: Lists what must be returned and by when.
- COBRA or Insurance Continuation Info: Especially important for key hires or in layoffs.
- Review Period: Federal law requires at least 21 days to review if the employee is over 40 (plus a 7-day revocation window).
What Severance Isn’t
Severance isn’t a bribe. It’s a strategic way to:
- Protect your company from lawsuits
- Say thank you for service
- Smooth out the post-employment relationship
But it only works if the agreement is voluntary, clearly written, and legally compliant.
Final Thoughts
Startups may not always offer severance - but when you do, it should be intentional, protective, and fair. A solid severance agreement can save you from costly disputes and show future employees that you handle exits with professionalism and care.
Frequently Asked Questions
FAQs on Severance Agreements for Startups
Are startups legally required to offer severance?
No. Severance is optional, unless a written contract or company policy guarantees it.
How much severance should a startup pay?
It varies. Many companies use a formula like two weeks of pay per year of service, but small startups may offer a flat amount instead.
Do employees have to sign a severance agreement?
No. The agreement must be voluntary. If an employee refuses to sign, they may not receive the severance benefits.
What makes a severance agreement enforceable?
It must be clearly written, voluntary, and compliant with state and federal laws. Agreements with older workers have additional requirements under the Older Workers Benefit Protection Act.
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